UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) {X} Quarterly report pursuant to Section 13 and 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended MARCH 31, 1998 -------------- or {_} Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from___________to___________ Commission file number 0-27248 ------- LEARNING TREE INTERNATIONAL, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 95-3133814 - ----------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 6053 WEST CENTURY BOULEVARD, LOS ANGELES, CA 90045 ------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (310) 417-9700 -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of common stock, $.0001 par value, outstanding as of May 5, 1998, is 21,994,507 shares. Total number of pages 12 ---- LEARNING TREE INTERNATIONAL, INC. FORM 10-Q MARCH 31, 1998 TABLE OF CONTENTS PART I FINANCIAL STATEMENTS PAGE ---- Item 1. Financial Statements: Consolidated Balance Sheets........................ 3 Consolidated Statements of Operations.............. 4 Consolidated Statements of Cash Flows.............. 5 Notes to Consolidated Financial Statements......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 7 PART II--OTHER INFORMATION Item 1. Legal Proceedings.................................... 10 Item 2. Changes in Securities................................ 11 Item 3. Defaults Upon Senior Securities...................... 11 Item 4. Submission of Matters to a Vote of Security Holders.. 11 Item 5. Other Information.................................... 11 Item 6. Exhibits and Reports on Form 8-K..................... 11 SIGNATURES....................................................... 12 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, September 30, 1998 1997 ------------ ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................... $ 35,098,000 $ 32,441,000 Short-term interest-bearing investments...... 27,865,000 24,330,000 Trade accounts receivable, net............... 18,249,000 23,201,000 Prepaid marketing expenses................... 869,000 1,356,000 Prepaid expenses and other................... 3,630,000 4,818,000 ------------ ------------ Total current assets................... 85,711,000 86,146,000 ------------ ------------ Equipment and leasehold improvement, net....... 27,902,000 27,429,000 Deferred income taxes.......................... 559,000 710,000 Other assets................................... 9,720,000 8,066,000 ------------ ------------ Total assets......................... $123,892,000 $122,351,000 ============ ============ LIABILITIES Current liabilities: Current portion of debt and capital leases... $ -- $ 19,000 Trade accounts payable....................... 13,201,000 17,993,000 Deferred revenue............................. 31,457,000 27,531,000 Accrued liabilities.......................... 5,373,000 5,764,000 Income taxes payable......................... 3,112,000 3,726,000 ------------ ------------ Total current liabilities.............. 53,143,000 55,033,000 Deferred facilities rent....................... 1,486,000 1,423,000 ------------ ------------ Total liabilities...................... 54,629,000 56,456,000 ------------ ------------ Commitments STOCKHOLDERS' EQUITY Common Stock, $.0001 par value; 75,000,000 shares authorized 21,995,000 shares issued and outstanding..................... 2,000 2,000 Additional paid-in capital................... 42,992,000 42,992,000 Notes receivable from stockholders........... (11,000) (14,000) Deferred compensation--stockholders.......... (87,000) (127,000) Cumulative foreign currency translation...... (1,145,000) (1,066,000) Retained earnings............................ 27,512,000 24,108,000 ------------ ------------ Total stockholders' equity............. 69,263,000 65,895,000 ------------ ------------ Total liabilities and stockholders' equity............................... $123,892,000 $122,351,000 ============ ============ See accompanying notes to consolidated financial statements. 3 LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Six Months Ended March 31, March 31, ---------------------------------- ---------------------------------- 1998 1997 1998 1997 --------------- -------------- --------------- -------------- Revenues............................................ $ 45,005,000 $ 35,759,000 $ 90,184,000 $ 71,769,000 Costs of revenues................................... 18,677,000 15,448,000 39,017,000 29,790,000 --------------- -------------- --------------- -------------- Gross profit....................................... 26,328,000 20,311,000 51,167,000 41,979,000 --------------- -------------- --------------- -------------- Operating expenses: Course development................................. 2,721,000 2,372,000 5,886,000 4,754,000 Sales and marketing................................ 15,574,000 11,409,000 30,412,000 21,300,000 General and administrative......................... 5,562,000 4,151,000 11,007,000 7,900,000 --------------- -------------- --------------- -------------- 23,857,000 17,932,000 47,305,000 33,954,000 --------------- -------------- --------------- -------------- Income from operations.............................. 2,471,000 2,379,000 3,862,000 8,025,000 --------------- -------------- --------------- -------------- Other income (expense): Interest expense................................... (4,000) (9,000) (9,000) (17,000) Interest income.................................... 709,000 850,000 1,530,000 1,720,000 Foreign exchange................................... (15,000) 4,000 (47,000) 17,000 Other.............................................. 40,000 (35,000) (177,000) (323,000) --------------- -------------- --------------- -------------- 730,000 810,000 1,297,000 1,397,000 --------------- -------------- --------------- -------------- Income before provision for income taxes............ 3,201,000 3,189,000 5,159,000 9,422,000 Provision for income taxes.......................... 1,088,000 1,085,000 1,754,000 3,204,000 --------------- -------------- --------------- -------------- Net income.......................................... $ 2,113,000 $ 2,104,000 $ 3,405,000 $ 6,218,000 =============== ============== =============== ============== Earnings per common share........................... $ 0.10 $ 0.10 $ 0.15 $ 0.28 =============== ============== =============== ============== Earnings per common share assuming dilution......... $ 0.10 $ 0.10 $ 0.15 $ 0.28 =============== ============== =============== ============== Weighted average number of shares outstanding....... 21,995,000 21,995,000 21,995,000 21,995,000 =============== ============== =============== ============== Diluted shares outstanding.......................... 22,003,000 22,088,000 22,036,000 22,061,000 =============== ============== =============== ============== See accompanying notes to consolidated financial statements. 4 LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended March 31, ----------------------------- 1998 1997 ------------- ------------- Cash flows--operating activities: Net income............................................................... $ 3,405,000 $ 6,218,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................................... 4,553,000 2,326,000 (Gains) losses on disposals of equipment, property and leasehold improvements....................................................... 197,000 332,000 Deferred facilities rent charges........................................ 60,000 (209,000) Amortization of deferred compensation................................... 40,000 40,000 Unrealized foreign exchange (gains) losses.............................. 86,000 (55,000) Change in net assets and liabilities: Trade accounts receivable........................................... 4,889,000 (1,670,000) Prepaid marketing expenses.......................................... 484,000 (161,000) Prepaid expenses and other.......................................... 1,174,000 (385,000) Income taxes........................................................ (490,000) 1,538,000 Trade accounts payable.............................................. (4,850,000) 1,671,000 Deferred revenue.................................................... 3,920,000 6,408,000 Accrued liabilities................................................. (330,000) (43,000) ------------ ------------ Net cash provided by operating activities............................... 13,138,000 16,010,000 ------------ ------------ Cash flows--investing activities: Purchases of equipment, property and leasehold improvements.............. (5,690,000) (10,001,000) Retirements of equipment, property and leasehold improvements............ 455,000 5,000 Proceeds from short-term interest-bearing investments held to maturity... 11,482,000 14,544,000 Proceeds from short-term interest-bearing investments held for sale...... 4,800,000 -- Purchases of short-term interest-bearing investments: Investments held to maturity......................................... (11,117,000) (4,500,000) Investments held for sale............................................ (8,700,000) (400,000) Other, net............................................................... (1,680,000) (660,000) ------------ ------------ Net cash used in investing activities................................... (10,450,000) (1,012,000) ------------ ------------ Cash flows--financing activities: Principal payments of debt and capital leases............................ (19,000) (69,000) Collections of stockholder notes......................................... 3,000 43,000 ------------ ------------ Net cash provided by (used in) financing activities..................... (16,000) (26,000) ------------ ------------ Effects of exchange rates on cash............................................ (15,000) (17,000) ------------ ------------ Net increase (decrease) in cash and cash equivalents......................... 2,657,000 14,955,000 Cash and cash equivalents at the beginning of the period..................... 32,441,000 24,541,000 ------------ ------------ Cash and cash equivalents at the end of the period........................... $ 35,098,000 $ 39,496,000 ============ ============ Supplemental disclosures: Income taxes paid....................................................... $ 2,265,000 $ 2,281,000 ============ ============ Interest paid........................................................... $ 2,000 $ 16,000 ============ ============ See accompanying notes to consolidated financial statements. 5 LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. Operations and Significant Accounting Policies ---------------------------------------------- The accompanying condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such regulations. Certain prior period balances have been reclassified to conform with the current period presentation. The condensed consolidated financial statements reflect all adjustments and disclosures which are, in the opinion of management, necessary for a fair presentation. All such adjustments are of a normal recurring nature. The condensed consolidated financial statements in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended September 30, 1997 that are contained in the Company's 1997 Annual Report on Form 10-K. Note 2. Computation of Net Income per Common share and Common Equivalent Share: ---------------------------------------------------------------------- The Company has adopted Financial Accounting Standards No. 128 (SFAS No. 128) "Earnings per Share" as of the start of fiscal 1998. Accordingly, the net income per common share and common equivalent share for fiscal 1997 has been restated to reflect the adoption of SFAS No. 128. The difference between the weighted average number of shares outstanding and the diluted shares outstanding is due to stock options. To calculate the number of diluted shares outstanding, the treasury stock method was used. For the three and six month periods ended March 31, 1998, 8,000 shares and 41,000 shares, respectively, were added to the weighted average number of shares outstanding. For the three and six month periods ended March 31, 1997, 93,000 shares and 66,000 shares, respectively, were added to the weighted average number of shares outstanding. Note 3. Litigation: ----------- On April 16, 1998, a class action lawsuit was filed against certain officers and directors of the Company in the Superior Court of the State of California, County of Los Angeles, purportedly on behalf of those who purchased the Company's Common Stock between May 8, 1997 and November 3, 1997. The Company has not been named in the suit, but has indemnification agreements with such officers and directors. The Company has obtained a copy of the complaint which alleges violations of California law. The complaint alleges that the named officers and directors concealed an alleged deterioration of its business in early 1997 and realized profits by trading their shares of Company Common Stock while in possession of the alleged material adverse information. The complaint seeks an unspecified amount of compensatory damages and, additionally, seeks attorneys' and other costs, interest, and other relief. The named officers and directors have not yet filed answers to the complaint but have indicated that they intend to defend themselves vigorously in this proceeding. The Company is unable to estimate the outcome of this matter or any potential liability it may incur. The Company does have directors' and officers' insurance coverage. Even if the defendants prevail on the merits in such litigation or the costs are covered by insurance, the Company expects to incur legal and other defense costs as a result of such proceeding. This proceeding could involve a substantial diversion of the time of some members of management, and an adverse determination in, or settlement of, such litigation could involve the payment of significant amounts or could include terms in addition to such payments, which could have an adverse impact on the Company's business, financial condition, results of operations and cash flows. 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Learning Tree International, Inc. (the "Company"), is a leading worldwide provider of education and training for corporate information technology ("IT") professionals in business and government organizations. The Company develops, markets and delivers a broad, proprietary library of instructor-led course titles focused on client/server systems, intranet/Internet technologies, computer networks, operating systems, databases, programming languages, graphical user interfaces, object-oriented technology and IT management. The Company also tests and certifies IT professionals in 29 IT job functions. The Company's instructor-led courses are recommended for college credit by the American Council on Education. During 1997, the Company expanded the breadth of its instructor-led training activities through the introduction of its Learning Solutions Division. The Learning Solutions Division provides custom developed training programs for larger clients who need to train large numbers of their IT professionals and end-users. The focus of this new division is on training that supports the roll-out and use of new organization-wide information systems, tools and applications. Its first program was for General Motors Corporation, and was largely completed in the first quarter of fiscal 1998. The Company is currently working on a smaller follow-on program with General Motors, and is seeking additional contracts with other potential customers. Because this business depends upon obtaining a small number of large contracts, its revenues are inherently subject to fluctuation. In addition to its instructor-led courses, the Company develops, produces and markets a line of interactive computer-based training courses incorporating audio and graphical elements ("multimedia CBT") that are designed for both stand-alone CD-ROM and network-based delivery. The Company has been marketing its multimedia CBT products through direct mail and telemarketing methods, which focus on high volumes of comparatively smaller unit sales. The Company also markets its multimedia CBT products through field sales of higher value multimedia CBT contracts. To date, the majority of the Company's multimedia CBT revenues have been obtained through direct mail and telemarketing. In 1997, the Company also introduced a program of "Power Seminars," which were multi-day conferences consisting of a number of 1-day, multimedia lecture- style seminars in key information technologies. In November 1997, the Company announced that it was eliminating its Power Seminars program. Operations in the Power Seminars program ceased as of the end of the first quarter of fiscal 1998. RESULTS OF OPERATIONS In the second fiscal quarter ended March 31, 1998, revenues increased by $9.2 million or 26% to $45.0 million from $35.8 million for the corresponding quarter of the prior year. Income from operations for the quarter ended March 31, 1998 increased $92,000 or 4% to $2.5 million versus $2.4 million for the same quarter of fiscal 1997. Net income for the quarter ended March 31, 1998 was $2.1 million which was unchanged from the quarter ended March 31, 1997. For the six month period ended March 31, 1998, revenues increased by $18.4 million or 26% to $90.2 million from $71.8 million for the six months ended March 31, 1997. Income from operations for the six months ended March 31, 1998, decreased $4.1 million or 52% to $3.9 million versus $8.0 million for the corresponding period of the prior year. Net income for the six months ended March 31, 1998 decreased $2.8 million or 45% to $3.4 million versus $6.2 million for the corresponding period of the prior year. The growth of revenues in the second fiscal quarter was due, in large part, to an increase in the number of course participants in multi-day instructor-led courses to 27,765 in the quarter ended March 31, 1998 versus 22,998 participants in the corresponding quarter of the prior year. For the six months ended March 31, 1998, the number of multi-day instructor-led course participants was 54,063 compared to 47,027 in the corresponding six month period of the prior year. The additional course participants are primarily attributable to increased marketing and sales expenditures and an increase in the net number of instructor-led course titles to 146 in the second quarter of fiscal 1998 compared to 124 in the same period a year earlier. Revenues for the three and six month periods ended March 31, 1998 also reflect a 4% increase in average revenue per multi-day course participant, which resulted from increases in average course duration and prices. The increase in revenues also reflects revenues earned by the Company's Learning Solutions Division under its contract with General Motors to train General Motors' personnel and dealers on the use and support of a new proprietary information system, GM ACCESS, as well as the growth of revenues from the multimedia CBT product line. 7 The Company's cost of revenues for its instructor-led courses primarily includes the costs associated with course instructors, course materials, course equipment, freight, classroom facilities and refreshments. For multimedia CBT courses, cost of revenues primarily includes the costs of amortized development, manufacturing, distribution and support. The cost of revenues decreased to 41.5% of revenues in the second quarter of fiscal 1998 compared to 43.2% in the second quarter of fiscal 1997, primarily because of an increase in revenues per instructor-led course event. For the six months ended March 31, 1998, the cost of revenues increased to 43.3% of revenues compared to 41.5% for the same period in fiscal 1997, largely because of lower gross margins in the Power Seminars and Learning Solutions product lines compared with the Company's traditional multi- day instructor-led courses and multimedia CBT courses, and also because of the increased cost per multi-day instructor-led course event. For the second quarter of fiscal 1998, cost of revenues increased $3.3 million or 21% to $18.7 million from $15.4 million for the same quarter of fiscal 1997. For the six months ended March 31, 1998, the Company's cost of revenues increased by $9.2 million or 31% to $39.0 million from $29.8 million for the corresponding period in the prior year. The increases in the cost of revenues compared to the same periods in the prior year, are primarily the result of a) the increased number of multi-day instructor-led course events and b) the costs associated with the increased sales in the multimedia CBT product line. The number of multi-day instructor-led course events increased 21% in the quarter ended March 31, 1998 to 1,743 course events from 1,446 course events in the quarter ended March 31, 1997. For the six month period ended March 31, 1998, the number of instructor-led course events increased 15% to 3,369 from 2,931 for the corresponding period in the prior year. Costs per multi-day instructor-led course event decreased approximately 2% in the second quarter of fiscal 1998 compared to the second quarter of fiscal 1997. Costs per multi-day instructor-led course event have increased approximately 5% for the first six months of fiscal 1998 compared to the corresponding period of the prior year, reflecting lower costs during the first quarter of fiscal 1997. In January 1998, the Company signed an agreement to lease a new education center in the United Kingdom which is anticipated to be operational in early fiscal 1999. In April 1998, the Company opened a new larger education center in Boston. Course development expense includes the costs of developing new course titles and updating the Company's existing course library. The principal costs are for internal product development staff and independent consultants who serve as subject matter experts. Course development expenses increased by $349,000 or 15% to $2.7 million for the quarter ended March 31, 1998 versus $2.4 million in the quarter ended March 31, 1997. For the six months ended March 31, 1998, course development expenses increased $1.1 million or 24% to $5.9 million from $4.8 million for the corresponding period in the prior year. These increases reflect the costs associated with the Company's strategy of expanding its multi- day instructor-led and multimedia CBT course libraries to meet its customers' technology training needs and updating and maintaining the growing course title libraries. The Company plans to continue its strategy of expanding both its instructor-led course library and its multimedia CBT library, including additional titles in the areas of intranet/Internet technologies, computer networking, Java, Windows NT, programming languages and databases. During the first quarter of fiscal 1998, the Company introduced a new web- based engine for its multimedia CBT product line and is continuing to allocate resources to develop new features and capabilities for this engine. Since all new CBT titles are being developed using this evolving engine, and because resources are being allocated to adapt existing courses based on prior engines to the new web-based engine, the rates of introduction of new CBT titles in the first and second quarters were, and the expected release rate of new courses in the next quarter is expected to be, less than during the fourth quarter of fiscal 1997 when 24 CBT titles were released. To date, the Company has released 104 multimedia CBT course titles. Sales and marketing expenses include salaries, commissions and travel- related costs for sales and marketing personnel, the costs of designing, producing and distributing direct mail marketing and media advertisements, and the costs of information systems to support these activities. Sales and marketing expenses increased $4.2 million or 37% to $15.6 million for the quarter ended March 31, 1998 versus $11.4 million for the quarter ended March 31, 1997. For the six months ended March 31, 1998, sales and marketing expenses increased $9.1 million or 43% to $30.4 million from $21.3 million for the corresponding period in the prior year. The increase in sales and marketing expenses occurred as a result of an increase in telemarketing and field sales staff and increased direct mail marketing. The Company expects that there will be a decrease in the rate of growth in sales and marketing expenses during the second half of fiscal 1998 compared to the rate of growth in the first half of fiscal 1998 in order to better match the current slower growth rate of revenues. The decision to reduce the growth rate of sales and marketing expenditures in upcoming quarters is subject to reevaluation from time to time based upon market conditions and other factors. 8 General and administrative expenses increased $1.4 million or 34% to $5.6 million for the quarter ended March 31, 1998 compared to $4.2 million in the same quarter of the prior year. For the six months ended March 31, 1998, general and administrative expenses increased $3.1 million or 39% to $11.0 million from $7.9 million for the corresponding period in the prior year. The increase in general and administrative expenses reflects increases in information systems and other administrative staff and increases in facilities related costs over the prior year. As a percentage of revenue, these costs increased to 12% in the six months ended March 31, 1998 from 11% in the corresponding period of the prior year. Other income (expense) is comprised of interest income, interest expense, foreign currency gains and losses and other. Other income decreased $80,000 to $730,000 for the quarter ended March 31, 1998 versus $810,000 for the corresponding quarter in the prior year. For the six months ended March 31, 1998, other income increased by $100,000 to $1.3 million from $1.4 million for the corresponding six month period in the prior year. The decreases in net other income were primarily attributable to less interest income than in the prior year. The provision for income taxes was $1.1 million for each of the second fiscal quarters ended March 31, 1998 and 1997. For the six months ended March 31, 1998, the provision for income taxes decreased $1.4 million to $1.8 million from $3.2 million for the corresponding period in the prior year. The decrease in the income tax provision reflects the decrease in taxable income. BACKLOG At March 31, 1998, the Company had a backlog of orders for instructor-led courses in the amount of $29.4 million, which represented an 18% increase over the backlog of $24.9 million at March 31, 1997. Only a portion of the Company's backlog is funded. There can be no assurance that the growth in the backlog will continue or that orders comprising the backlog will be realized as revenue. FLUCTUATIONS IN QUARTERLY RESULTS The Company's operating results may fluctuate based on various factors, including the frequency of course events, the number of weeks in a quarter during which courses can be conducted, the timing, frequency and size of, and response to, the Company's direct mail marketing and advertising campaigns, the timing of the introduction of new course titles and alternate delivery methods, the mix between customer-site course events and Learning Tree-site course events, competitive forces within the current and anticipated future markets served by the Company, the spending patterns of its customers, currency fluctuations, inclement weather and general economic conditions. Fluctuations in quarter-to-quarter results may also occur as a result of differences in the timing of, and the time period between, the Company's expenditures on the development and marketing of its courses and the receipt of revenues. The Company's revenues and income have historically varied significantly from quarter to quarter due to seasonality and other factors. The Company generally has greater revenue and operating income in the second half of its fiscal year (April through September) than in the first half of its fiscal year (October through March). This seasonality is due in part to seasonal spending patterns of the Company's customers arising from budgetary and other business factors as well as weather, holiday and vacation considerations. In addition, the seasonality of the Company's operating results reflects the quarterly differences in the frequency and size of the Company's direct mail marketing campaigns. There can be no assurance that these seasonal factors or their effects will remain the same in the future. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents and short-term interest-bearing investments increased to $63.0 million at March 31, 1998 from $56.8 million at September 30, 1997, primarily as a result of cash provided by operations. For the six months ended March 31, 1998, cash provided by operations was approximately $13.1 million compared to $16.0 million during the same period in the prior year. The decrease in cash provided by operations reflects the decrease in profits and a smaller increase in deferred revenues arising from prepaid multi-enrollment programs. These changes were offset in part by increased depreciation. As of March 31, 1998, the Company had a net working capital balance of $32.6 million. During the six months ended March 31, 1998, the Company invested $5.7 million in equipment and facilities compared to $10.0 million in the same period of the prior year. The higher level of investment during the prior year was primarily related to the acquisition of additional course equipment to support the higher growth rate of course events at that time, to upgrade course equipment capabilities and to build-out office facilities. In January 1998, the Company entered into a lease agreement for a large education center in the United Kingdom. The Company expects to begin executing courses in this new facility during the first fiscal quarter of 1999. The terms of the 9 lease will require lease payments of approximately $4.3 million per annum and a cash deposit or letter of credit in the amount of approximately $10.0 million. Any cash deposit will bear interest to the Company and the required level of the cash deposit or letter of credit will decline if certain financial ratios have been met. The Company expects to purchase additional course equipment and to enter into leases for additional facilities in other existing course cities during fiscal 1998. However, other than the foregoing transaction, as of March 31, 1998, the Company had no material future purchase obligations, capital commitments or debt and believes that its cash and cash equivalents, its short- term interest-bearing investments and the cash provided by its operations will be sufficient to meet its cash requirements for the foreseeable future. YEAR 2000 COMPLIANCE The Year 2000 Compliance issue exists as a result of the use of two digit date fields, rather than four digit date fields, by many computer systems and software applications to define the applicable year. As the century changes, systems which are not Year 2000 Compliant will recognize the year 2000 as 1900, or not at all. The inability to recognize or properly treat the year 2000 may cause systems to process financial and operational information incorrectly. The Company has assessed and continues to assess the impact of the Year 2000 Compliance issue on its operations. The Company believes, based upon its internal reviews and other factors, that there will be no interruption of its operations as a result of the Year 2000 issue. It is expected that the future internal and external costs to be incurred to make the Company's computer systems and software Year 2000 Compliant will not have a material effect on the Company's results of operations or financial position. Additionally, the computer software products sold by the Company are Year 2000 Compliant. However, there can be no assurance that the Company's customers or vendors will not be affected by the Year 2000 Compliance issue or that this will not affect the timing or amount of the Company's products and services customers purchase or vendors provide. FORWARD-LOOKING INFORMATION Except for historical information contained herein, the matters discussed in this Form 10-Q are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in such forward-looking statements. Such risks and uncertainties include, without limitation, the Company's dependence on the timely development, introduction and customer acceptance of new courses and products, the impact of competition and downward pricing pressures, the effect of changing economic conditions, the Company's ability to attract and retain key management and other personnel, risks in technology development, the risks involved in currency fluctuations, and the other risks and uncertainties detailed from time to time in the Company's filings with the Securities and Exchange Commission, including the Company's 1997 Annual Report on Form 10-K. PART II - OTHER INFORMATION Item 1: LEGAL PROCEEDINGS On April 16, 1998, a class action lawsuit was filed against certain officers and directors of the Company in the Superior Court of the State of California, County of Los Angeles, purportedly on behalf of those who purchased the Company's Common Stock between May 8, 1997 and November 3, 1997. The Company has not been named in the suit, but has indemnification agreements with such officers and directors. The Company has obtained a copy of the complaint which alleges violations of California law. The complaint alleges that the named officers and directors concealed an alleged deterioration of its business in early 1997 and realized profits by trading their shares of Company Common Stock while in possession of the alleged material adverse information. The complaint seeks an unspecified amount of compensatory damages and, additionally, seeks attorneys' and other costs, interest, and other relief. The named officers and directors have not yet filed answers to the complaint but have indicated that they intend to defend themselves vigorously in this proceeding. The Company is unable to estimate the outcome of this matter or any potential liability it may incur. The Company does have directors' and officers' insurance coverage. Even if the defendants prevail on the merits in such litigation or the costs are covered by insurance, the Company expects to incur legal and other defense costs as a result of such proceeding. This proceeding could involve a substantial diversion of the time of some members of management, and an adverse determination in, or settlement of, such litigation could involve the payment of significant amounts or could include terms in addition to such payments, which could have an adverse impact on the Company's business, financial condition, results of operations and cash flows. 10 Item 2: CHANGES IN SECURITIES Not Applicable Item 3: DEFAULTS UPON SENIOR SECURITIES Not Applicable Item 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders on March 6, 1998. During the Annual Meeting of Stockholders, the only matter voted upon was the election of directors. The following are the results of the voting: 1. Election of directors: Shares for Shares withheld ---------- --------------- Class III Directors for a term expiring in 2001. David C. Collins 20,010,699 38,170 Eric R. Garen 20,010,912 37,957 The current terms of the Class I Directors, W. Mathew Juechter and Alan B. Salisbury, continue until the 1999 Annual Meeting of Stockholders. The current terms of the Class II Directors, Michael W. Kane and Max S. Shevitz, continue until the 2000 Annual Meeting of Stockholders. Item 5: OTHER INFORMATION Not Applicable Item 6: EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 27.1 Financial Data Schedule b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended March 31, 1998. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LEARNING TREE INTERNATIONAL, INC. Dated: May 12, 1998 By: /s/ Gary R. Wright -------------------------------- Gary R. Wright Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) 12